CURRENCY OUTLOOK - APRIL 2017

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March lookbackGBPEUR lost some 1.5% on the month and certainly not as much as could have been reasonably expected before the triggering of Article 50. The logic behind a weaker pound and stronger Euro has of course been Brexit, but also an increase in European inflation levels and improving economic data in the form of Purchasing Managers Index (PMI) data. German headline inflation was as high as 2.2% in February, a level not seen since August 2012. Germany has been openly asking for the ECB to consider tapering its Quantitative Easing (QE) policy. Manufacturing PMI was reported at 56.2 compared to the expected 55.3, Services PMI was reported at 56.5 compared to the expected 55.4. This data pushed GBPEUR lower, however at the end of the month the ECB pulled the rug from under the Euro’s feet by saying that the market was misinterpreting its recent messages and that it was very concerned about higher yields. (i.e. ECB still wants low interest rates) German CPI for March was also lower than expected at +1.6% and these factors have weakened the single currency. The Dutch elections saw the far right Freedom party do badly and this calmed the market.

April events, opportunities and risksNow that Article 50 has been triggered the market will look to both economic and political news for direction. We also should not forget the markets positioning which is showing the IMM holding a short position equivalent to £6.75 billion. Also, this position does not include the sterling sold in the cash markets so it can be concluded that when GBPUSD falls it could have many speculators who will be happy to buy it. In this case any move lower from here could be a slow one, and certainly different from the fall experienced last June. Specifically regarding Brexit, the UK Government has asked for a new trade treaty to be agreed alongside the departure terms as well as “implementation periods” (being time for business to operate under current EU rules before changing to new agreed rules) for certain industries. With the EU insisting on a Euro 60 billion “exit fee” before a new trade treaty is even started to be discussed and the first negotiations to have been pencilled in for June 2017, there is plenty of potential for the UK economy to slow down and with it for sterling to fall in the medium term.

Base Rate: 0.25%GDP: +2.0% YoYCPI: 2.3% YoYUnemployment: 4.7%Current account: -£25.5 billion QoQ

Mon 3 AprManufacturing PMI

Wed 5 AprServices PMI

Tue 11 AprCPI YoY

Fri 21 AprRetail Sales MoM

Tue 4 AprConstruction PMI

Fri 6 Apr Manufacturing Production MoM

Fri 28 AprPrelim GDP QoQ

Wed 12 Apr Average Earnings Index 3MoY

03 04 06 281205 11 21

£/€

April 2017 UK events

£ Fundamental dataChart source: Bloomberg, Mar 30th

© 2017 Associated Foreign Exchange, Inc. All rights reserved.

Currency outlookTrevor Charsley - Senior Markets Analyst

March lookbackInitial defeat for the government in the House of Lords over the Brexit bill and calls from Scotland’s First Minister Sturgeon for another Scottish independence referendum, slightly delayed the triggering of Article 50 to March 29th. The last spring budget on March 8th saw Chancellor Hammond try to raise National Insurance on the self-employed from 9% to 11%, but he was forced into an embarrassing U turn as this move led to a country wide outcry. The market sold GBPUSD to a new 22 year record for short positions on the IMM (Reuters), as it considered the negative ramifications of the triggering of Article 50 including repeated calls from the EU for the UK to pay a Euro 60 billion “leavers fee.” As the House of Lords have ruled that after the UK leaves it is not responsible for any future payments to the EU, (except those specifically agreed) then this “leavers fee” could easily be a sticking point in negotiations. After being sold the pound bounced on the back of Bank of England concerns over inflation with Consumer Price Index now at 2.3% and retail sales data coming in at +1.4%, suggesting that the UK consumer is still spending.

April events, opportunities and risksThe Fed said it was going to hike US rates in a gradual manner and that is precisely what it has done. However, the US Dollar has not reacted in textbook fashion to this move, with the US Dollar index falling 3% and the US equity markets tumbling 3.5%. After the unsuccessful attempt to reform Obamacare President Trump and his administration have now turned their gaze to tax reform, with US Corporation tax at 35% some are saying it is ripe for change. However, the market is now concerned about President Trump’s ability to get his changes through Congress, this is weighing upon US Dollar sentiment. The economic picture tells a different story as US jobs data has been very positive the last two months with increases of 253k for February and 227k in January. Consumer price inflation has also been averaging some monthly increases of +0.35% for the last four months, if these two important sets of economic data continue to show similar levels of improvement then the market may start to price in a quickening pace of rate hikes this year.

(Please see GBPEUR for Sterling releases)

FED funds: 0.75%-1.00%GDP: +2.1% QoQCPI: +0.1% MoMUnemployment: 4.7%Trade balance: -$48.5 billion

Mon 3 AprISM Manufacturing PMI

Wed 5 Apr ADP Non-Farm Employment Change, ISM Non-Manufacturing PMI, Crude Oil Inventories, FOMC Meeting Minutes

Fri 7 Apr Average Hourly Earnings MoM, Non-Farm Employment Change, Unemployment Rate

Thu 13 Apr PPI MoMUnemployment Claims

Tue 18 AprBuilding Permits

Wed 26 Apr Crude Oil Inventories

Fri 28 AprAdvance GDP QoQ

Thu 6 AprUnemployment Claims

Wed 12 AprCrude Oil Inventories

Fri 14 AprCPI MoM, Core CPI MoM, Core Retail Sales MoM, Retail Sales MoM, Prelim UoM Consumer Sentiment

Wed 19 AprCrude Oil Inventories

Thu 27 Apr Core Durable Goods Orders MoM, Unemployment Claims

Tue 25 AprCB Consumer Confidence

Thu 20 AprPhilly Fed Manufacturing Index, Unemployment Claims

03 05 06 12 14 19 27252007 13 18 26 28

£/$ Currency outlookTrevor Charsley - Senior Markets Analyst

April 2017 US events

US $ Fundamental dataChart source: Bloomberg, Mar 30th

© 2017 Associated Foreign Exchange, Inc. All rights reserved.

March lookbackLast month the market was pricing in event risk in the shape of the Dutch elections. Ultimately Geert Wilders the leader of the Freedom party, gained five more seats than in the previous parliament but didn’t manage to gain as many seats as predicted, Mark Rutte the former Prime Minister won the most seats for the People’s Party and said that Wilders’ movement was the “wrong sort of populism” the market stopped buying German bunds for safety and heaved a sigh of relief. With economic data improving (please see GBPEUR for details) the Euro found some support early in the month. President Trump also couldn’t get his healthcare reform bill through Congress and therefore this Euro strength was exacerbated until the end of March when the ECB combined with a surprise lower German inflation reading to weaken the Euro.

April events, opportunities and risksEmmanuel Macron is now leading Marine Le Pen in the French opinion polls. Although the market doesn’t trust the polls anymore and some are saying that there is a huge 40% of undecided voters available for the candidates to win over, it has stopped pricing in a possible Le Pen victory in the French presidential elections. The first round for French elections takes place on April 23rd which sees all but two candidates excluded and the final election round takes place on May 7th. Francois Fillon the centre right candidate has lost support over his embezzlement fiasco and is unlikely to get through to the second round. The market has been buying EUR recently on the back of stronger inflation and PMI data. However, the ECB is still sticking to its ultra-easy monetary policy. In this case the ECB minutes will be important as the market gauges if or when the ECB will start normalise policy. Although last month’s surprise lower German inflation reading is being attributed to a lower oil price and late Easter bank holidays in Germany, the reading of +1.5% for March will not encourage the ECB to change its policy anytime soon. The Consumer Price Index released on April 28th will also be an important factor here.

Base Rate: -0.4%GDP: +0.4% QoQCPI: +1.5% YoYUnemployment: 8.5%Trade balance: +€15.7 billion MoM

Tues 11 AprIndustrial production MoM

Fri 7 AprGerman trade balance

Tues 4 AprRetail sales MoM

Thu 27 Apr Minimum Bid RateECB Press Conference

Sun Apr 23French presidential election

Wed 19 AprFinal CPI YoY

Thu 6 Apr ECB MPC meeting minutes

Fri 21 Apr Flash services PMI

Mon 24 AprGerman IFO Business Climate

Fri 28 AprCPI and core CPI flash estimate YoY

Tues 18 AprGerman ZEW economic sentiment

110704 06 21 24 2818 272319

€/$ Currency outlookTrevor Charsley - Senior Markets Analyst

€ Fundamental dataChart source: Bloomberg, Mar 30th

© 2017 Associated Foreign Exchange, Inc. All rights reserved.

April 2017 EU events

March lookbackAUDUSD opened and closed the month at very similar levels despite at one stage falling 2.5% and then making a new three month high. The move lower was caused by poor trade data and weak metal prices at the start of the month, before pushing higher on the back of US Dollar weakness caused by President Trump’s defeat in Congress over healthcare reform. A possible storm cloud is brewing for the commodity currencies in the United States’ approach to global free trade, this was seen at the G20 meeting with the US insisting on the exclusion of a clause relating to the non- adoption of protectionist policies. Canadian core retail sales were a big positive for the Loonie coming in at +1.7% MoM against expectations of +1.3%. However, the fall in the oil price pressured the Loonie as well. The Reserve Bank of New Zealand kept interest rates steady and added that monetary policy would remain accommodative for a considerable period of time.

April events, opportunities and risksThe first week of April sees a meeting between US President Trump and Chinese Premier Xi. In his pre-election campaign Trump was very vocal in his criticism of China and its unfair protectionism when relating to trade, so he will be duty bound to make his criticism clear to Premier Xi. Any friction here could easily knock global trade and therefore will not be good for commodity currencies, this will be a keenly watched meeting. We have the Reserve Bank of Australia meeting on April 4th and the Bank of Canada on April 12th, although we expect no change to interest rates from either central bank. It is worth keeping an eye on the oil price as well as there is still stockpiling from the US fracking industry which weighs upon the black gold. Helping support it is the rumour that Opec could extend its production cut deal.

Official Cash Rate: 1.5%GDP: +2.4% YoYCPI: +1.5% QoQUnemployment: 5.9%Current account: -AUD 3.853 billion QoQ

AUD economic data

Tue 4 AprAUD Trade Balance, AUD Cash Rate, AUD RBA Rate Statement, NZD GDT Price Index, CAD Trade Balance

Wed 12 AprCAD BOC Monetary Policy Report, CAD BOC Rate Statement, CAD Overnight Rate, CAD BOC Press Conference

Tue 18 AprAUD Monetary Policy Meeting Minutes, NZD GDT Price Index (tentative)

Wed 26 Apr AUD CPI QoQAUD Trimmed Mean CPI QoQ

Thu 20 Apr AUD Employment ChangeAUD Unemployment Rate

Mon 3 AprAUD Retail Sales MoM

Fri 14 AprCAD Manufacturing Sales MoM

Fri 7 AprCAD Employment Change, CAD Unemployment Rate

Wed 19 AprCPI QoQ

Fri 21 AprCAD CPI MoMCAD Core Retail Sales MoM

Fri 28 AprCAD GDP MoM

0403 1407 19 21 2812 18 2620

April 2017 RoW events

Chart source: Bloomberg, Mar 30th

© 2017 Associated Foreign Exchange, Inc. All rights reserved.

Currency outlookTrevor Charsley - Senior Markets AnalystRoW

Trevor Charsley

T: +44 (0)20 7004 3866E: tcharsley@afex.com

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